MF Global: Where Is The Missing Money?

I put up a column on Tuesday at Forbes.com that explains, in theory, what I think happened to MF Global’s missing $600 million in customer assets. It’s hard to describe the reaction to the story without jumping up and down and clapping. There’s so much interest in the subject and so little information being provided by mainstream media.

Here in Chicago, everyone is mad and no one knows who has the answers.

MF Global’s auditor is PricewaterhouseCoopers, who inherited the client when Man Financial, also a client, spun off the brokerage firm in 2007.

Almost everyone wondering where the missing MF Global customer assets have gone thinks they will show up eventually.

I believe the assets are long gone.

Unlike the shell game, there is no bean under the MF Global dixie cup. The mixed bag of marketable securities taken from customer segregated accounts, used most likely to meet margin calls and satisfy “important” customers closing accounts during the last days, will, in my opinion, never be seen again.

Too much time has passed for anyone to still reasonably expect that the “discrepancy” is just a timing difference or a misallocation between accounts, according to several sources who prefer to remain anonymous because of the sensitivity of the situation. All of the statements made on the record by those in a position to know point to assets taken out of the firm and now gone for good.

CFTC in bankruptcy filing October 31 according to The Financial Times: The CFTC, in a court filing, revealed MF Global’s general counsel Laurie Ferber emailed the regulator at 7.18pm Monday – hours after the bankruptcy filing – to say that it had “discovered a significant shortfall in its segregated funds account”.

Joint statement of CFTC and SEC on November 1: “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

The CME Group on November 2: “CME completed its on-site review last week. [Reportedly Monday.] At that time, the results of our review indicated that MF Global was in compliance with its segregation requirements. It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011.”

MF Global’s missing money is a good example of what is wrong with the auditing industry. Using customer money is perhaps the top or within the top 5 exposures of fraud in MF Global.

Online, real time tracking of those accounts could be used to both measure losses and warn of potential fraudulent action. Today’s technology makes it quite easy to accomplish, especially compared to the predicament todays mess represents.

And where was the internal accounting integrity, not to mention fiduciary duty? Are we led to believe no none knew this was happening? While no one would equate ignoring fraud with non-intervention of a pederast in a shower, the cases share alarming similarities. People are standing by doing nothing, either out of improper training, ineptitude or a disappointing version of the Milgram experiments. Because the sad fact is that Milgram taught us most people comply, even in ghastly situations far more physically terrible than fraud.

We need to change the structure of our organizations if we want increased efficiency, innovation and efficacy. Simply, this should never happen.

My theory is that MF Global got into a very big hole and was looking at the European trades as a way out. It’s sort of a double or nothing bet for a gambler. There is a considerable possibility that their trading losses since Jon Corzine’ took over the helm were much bigger than they were reporting to the public. So it may not have been the bad European bet that sunk MF Global. Those European trades were a scheme to recover their unreported losses.

Disgusting…The psychology of this country REALLY needs to change – doing things half-assed for the almighty $$$ (or, in this case, “bling” – yes, corporate America has gone ghetto) and stealing like there’s no tomorrow are really concepts that this country was not built on, but has been increasingly perpetuated through the last 15 years or so because of extremely weak, deceptive leadership that has allowed others to take advantage without consequence. God help us all…

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Francine McKenna (@retheauditors) is the Transparency Reporter at MarketWatch.com, a Dow Jones publication, where her work is also featured frequently in the Wall Street Journal. McKenna had more than twenty-five years of experience in consulting and professional services including tenure at two Big 4 firms, both in the US and abroad before becoming a journalist. Look for her prior columns, "Accounting Watchdog" at Forbes.com and "Accountable" at American Banker. For more information, click "About" at the bottom of this page. For more information contact Francine McKenna, fmckenna@mckennapartners.com